Fintech is an ever-growing industry that’s always keen to create and innovate technology to solve problems. This is particularly true of regtech, which exists to help financial services firms to stay compliant with regulation and manage their risks easier, freeing up employees for other things. However, patent lawsuits may be the downfall of certain fintechs, due to the sheer number of patents that exist in the industry.
Keith Bergelt is the CEO of Open Invention Network (OIN), the largest patent non-aggression community in history, created to support freedom of action in Linux as a key element of open-source software.
Here Keith discusses the role of potential patents issues in fintech and open source software, as well as ways to mitigate that risk.
The financial services industry has always been a strong supporter, and adopter, of new technologies that improve compliance, lower operating costs and better manage risk, among other benefits. Until the mid-2000s, it was cost-prohibitive for new market entrants to break into the financial services industry. Large, well-established banking, financial service and insurance (BFSI) companies had advantages in size – strong compliance systems to manage constantly changing regulations, a large and established client base, strong networks and the financial resources to withstand challenging economic conditions.
Financial services technology (fintech) vendors have leveraged AI, blockchain and automated payments, in combination with mobile and Internet technology, to transform how financial services like banking, investing, and borrowing services are made available to businesses and consumers. New technologies have significantly reduced the barrier-to-entry advantages that established financial services firms enjoyed, allowing new entrants to successfully compete. Additionally, new capabilities have made it easier for established BFSI firms to reach younger audiences and cross-sell to their existing customer base.
According to a 2020 report from TechSci Research, the global fintech market is expected to grow to $305 billion by 2025. Statista estimates that there are more than 10,600 fintech startups in the Americas, 9,300 in EMEA, and 6,129 in APAC. According to reports from CNBC and The Financial Times, ANT Group, the largest of the fintech-based financial services startups, had filed documents for an initial public offering (IPO). While temporarily halted by Chinese regulators, ANT Group’s IPO was expected to raise close to $30 billion, a record, for a 15% stake in the company, valuing the firm somewhere between $200 – $300 billion. It appears that ANT Group will execute some form of a liquidity event in the spring of 2021.
The success of fintech is due largely to the confluence of distributed computing, improved communications networks and devices, better security technology and perhaps most significantly, and the dynamic software innovations produced by the open-source software (OSS) community. The growth in capabilities and features in OSS has led to tremendous advances in capabilities that fintech applications and platforms can offer. With the growing adoption of OSS by in-house and third-party developers of fintech, new innovations will generate previously unimagined capabilities and financial products.
However, a potentially major impediment to the growth of fintech is patent lawsuits. While banks on their own have traditionally not been large patent holders, the sector has seen fintech startups, systems integrators, traditional hardware/software service providers and others patenting in technologies that are key to the sector. In total, there are hundreds-of-thousands of patents held in key technologies that read on capital markets and investing, core banking systems, cryptocurrencies, electronic payments, financial securities, insurance, personal finance, and wealth management as well as financing, crowdfunding and lending. In just the US, there are more than 2,000 blockchain patents. In fact, and indicative of the perception of the patent risk in the space, mobile payments company Square recently announced the launch of and its support for the Crypto Open Patent Alliance, a non-profit focused on keeping patents from becoming barriers to innovation in the crypto space. It asks that members pledge to never use their own crypto technology patents against anyone except for defensive purposes and that they pool all of their patents together to create a “shared patent library.”
While it has experienced exponential growth, the successful proliferation of open source in fintech as well as retail systems, banking networks, mobile phone manufacturers, telecom networks, cloud computing and blockchain platforms, among others, was not always a foregone conclusion. In 2003, there was an intellectual property (IP)-based attack on Linux, the most prolific of all OSS projects.
While the claims underlying the litigation ultimately were found to be without merit in the court proceeding, it was a wakeup call to several IP-savvy companies regarding the potential negative impact of patent aggression on the growth of Linux and OSS projects. IBM, Red Hat and SUSE (then Novell) coordinated an effort with Sony, Philips, and NEC to implement a solution designed to create a “patent no-fly zone” around core Linux and adjacent OSS, called the Linux System. The organisation is Open Invention Network and is charged with administering this patent no-fly zone, utilising a free license to require participant companies to forebear litigation and cross-license patents in the core of Linux and adjacent OSS. In the 15 years since its formation, the organisation has grown into the largest patent non-aggression community in history with an excess of 3,300 participant companies that own over 2.6 million patents and applications.
In addition to administering the highly successful royalty-free free license, the organisation has been one of the most active users of the America Invents Act’s pre-issuance submission program and through its actions prevented the grant of hundreds of patent applications with overly broad claims that, if issued as submitted, would have threatened Linux technology and products for years to come. This community-based organisation also routinely uses its central role as guardian of patent freedom in the open-source community to gather critical prior art to neutralise Linux-related litigation and pre-litigation patent assertions. In some cases, it has taken the extraordinary measure of forward deploying key assets from its defensive patent portfolio of more than 1,300 patents and applications to companies at risk or in litigation for the purpose of allowing these companies to better defend themselves from patent antagonists with often far larger patent portfolios and deeper pockets seeking to slow or stall the progress of Linux.
Given the current environment and trends, the financial services industry will increasingly be investing in fintech, and it will be a significant driver of technological innovation. Open Invention Network will continue to include core open source technology in the Linux System, thereby insulating its members from patent risk in this area. As the threat landscape morphs and new threats arise from the ranks of operating companies and patent assertion entities, the community will remain vigilant in acting to ensure fewer poor quality patents are issued, poor quality granted patents are invalidated and the community of companies pledging patent non-aggression in the core of Linux and adjacent open source technology grows.